The ITO, Ward-1(1), Ahmedabad V. Rajesh Kumar Ramesh Kumar & Co., Ahmedabad

ITA 3365/AHD/2007

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 8805 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 7 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-03-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 17-03-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 03-08-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: C K MISHRA
• Assessee Lawyers: P M MEHTA
• Keywords: Business expenditure; Proportionate interest
• Section: 37(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH D BEFORE SHRI T.K.SHARMA, JUDICIAL MEMBER AND SHRI N.S. SAINI, ACCOUNTANT MEMBER DATE OF HEARING: 17.03.10 DRAFTED ON: 17.03.10 ITA NO.3365/AHD/2008 ASSESSMENT YEAR : 2004-2005 ITO, CENTRAL WARD-1(4), 3 RD FLOOR, AAYKAR BHAVAN, AHMEDABAD. VS. RAJESH KUMAR RAMESH KUMAR & CO. 20, ZAVERI WAD, RATANPOLE, AHMEDABAD. PAN/GIR NO. : AAFFR 4620 Q (APPELLANT) .. (RESPONDENT) APPELLANT BY : SHRI C.K.MISHRA D.R. RESPONDENT BY: SHRI P.M.MEHTA. A.R. O R D E R PER N.S.SAINI , ACCOUNTANT MEMBER :- THIS IS AN APPEAL FILED BY THE REVENUE AGAINST TH E ORDER OF LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-I, AHMEDABAD D ATED 21.05.2007 FOR THE ASSESSMENT YEAR 2004-05. 2. THE GROUNDS OF THE APPEAL OF THE ASSESSEE READS AS UNDER:- 1. THE CIT(A) HAS ERRED IN LAW AND ON FACTS IN DEL ETING THE ADDITION OF RS.3,72,510/- OUT OF INTEREST EXPENSES MADE ON THE BASIS OF NON BUSINESS USE, WITHOUT FURNISHING THE F ACT THAT BORROWED FUNDS WERE USED FOR THE PURPOSES OTHER THA N BUSINESS. 2. THE CIT(A) HAS ERRED IN LAW AND ON FACTS IN HOLD ING THAT THE ASSESSING OFFICER HAS FAILED TO ESTABLISH NEXUS BET WEEN THE BORROWED FUNDS AND NON-BUSINESS USE, WITHOUT CONSID ERING CORRECT LEGAL POSITION ACCORDING TO WHICH ONUS LIES ON THE ASSESSEE TO PROVE THAT THE BORROWED FUNDS HAD BEEN USED FOR THE PURP OSES OF BUSINESS. 3. THE CIT(A) HAS ERRED IN LAW AND ON FACTS IN HOLD ING THAT HEAVY CASH BALANCES IN THE CASH BOOK AND CASH LYING WITH FEMA AUTHORITIES ARE FOR THE PURPOSES OF BUSINESS. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE AO . ITA NO.336 5 /AHD/2007 - 2 - 3. THE CIT(A) HAS DECIDED THE ISSUE AS UNDER:- 5. THE NEXT GROUND OF APPEAL RELATES TO DISA LLOWANCE OF INTEREST EXPENSES OF RS.3,72,510/-. IN PARA 6 OF TH E ORDER IT IS STATED BY THE A.O. THAT INTEREST EXPENSES DEBITED I NCLUDES RS.1,57,636/- PAID ON BORROWINGS AND RS.3,02,253/- PAID ON PARTNER'S CAPITAL ACCOUNT. THUS TOTAL INTEREST PAID IS OF RS.4,59,890/-. HE HAS NOTICED THAT THE TOTAL OF PAR TNER'S CAPITAL IS OF RS.49.21 LAKH AND BORROWINGS IS OF RS.18.13 LAKH ON WHICH INTEREST IS PAID. AS AGAINST THIS THE APPELLANT HAS FIXED ASSETS OF RS.10.41 LAKH AND CASH OF RS.35 LAKH LYING WITH TH E FEMA AUTHORITIES AND OF RS.19.83 LAKH ON HAND. IT IS OBS ERVED BY THE A.O. THAT LOOKING TO THE NATURE OF BUSINESS OF ANGA DIA THE REQUIREMENT OF CASH IS VERY NOMINAL FOR DAY TO DAY EXPENSES. THE ASSESSEE WAS, THEREFORE, ASKED TO JUSTIFY THE EXPEN SES. THE APPELLANT HAD SUBMITTED BEFORE THE A.O. THAT LOOKIN G TO THE NATURE OF BUSINESS OF ANGADIA, IT REQUIRED CASH FOR BRANCH TRANSFER AT VARIOUS PLACES AND ALSO FOR MEETING VARIOUS EXPENSE S OF ROUTINE NATURE. SOME TIMES CASH IS LOST IN TRANSIT ALSO A ND HENCE THE ASSESSEE IS REQUIRED TO MAKE IMMEDIATE PAYMENT TO T HE CLIENTS. THESE REASONS ARE NOT ACCEPTED BY THE A.O. STATING THAT THE APPELLANT HAS HUGE CASH RECEIPTS FROM THE DAY TO DA Y BUSINESS AND IT IS SUFFICIENT TO MEET THE EXPENSES. THE MONTHLY CASH BALANCE MAINTAINED IS VERY HIGH AT EVERY BRANCH THROUGHOUT THE YEAR. THE APPELLANT HAS NOT PROVED REASONS FOR TRANSFER OF CA SH AND ITS UTILIZATION. THE ASSESSEE PROTECTS ITS CLIENT BY CL AIMING CASH BELONGING TO ITSELF WHENEVER CASH IS CAUGHT BY THE FEMA AUTHORITIES, IT IS STATED THAT HENCE THE EXPENDITUR E INCURRED IS IN RELATION TO ACTIVITY PROHIBITED BY LAW AND EXPLANAT ION TO SECTION 37 IS APPLICABLE. HENCE PROPORTIONATE INTEREST RELATAB LE TO RS.54.84 LAKH IS DISALLOWED WHICH IS RS.3.72.510/- 5.1 THE APPELLANT SUBMITS THAT THE MAIN GROUND FOR DISALLOWANCE IS THAT THE APPELLANT HAD NOT USED THE BORROWED FUNDS FOR THE PURPOSE OF BUSINESS AND THE BASIS FOR THIS CONCLUSION OF THE A.O. IS HUGE CASH BALANCE REFERRED TO ABOVE. IT I S SUBMITTED THAT THE PLEA TAKEN BY THE A.O. THAT THE FUNDS LYING IN CASH BALANCE CANNOT BE CONSIDERED AS USED FOR BUSINESS IS INCORR ECT. HAVING REGARD TO THE NATURE OF THE BUSINESS OF THE APPELLA NT, ADEQUATE CASH BALANCE IS REQUIRED TO BE MAINTAINED. THE CASH BALANCE IS BEING MAINTAINED FROM YEAR TO YEAR. EVEN OTHER PERS ONS IN THE SAME BUSINESS ARE ALSO HAVING SIMILAR CASH BALANCE. THE CASH SEIZED BY FEMA AUTHORITIES WAS ALSO A BUSINESS CASH . IT IS SUBMITTED THAT THE BORROWED FUNDS ON WHICH INTEREST IS PAID ARE CARRIED FORWARD FROM EARLIER YEARS AND IN THE PAST NO DISALLOWANCE WAS MADE. THIS ITSELF SHOWS THAT THE BORROWINGS WER E USED FOR THE PURPOSE OF BUSINESS. AS REGARDS A.O'S ARGUMENT OF A PPLICATION OF PROVISO TO SECTION 37, IT IS SUBMITTED THAT THE CLA IM WAS U/S.36(1)(III) AND NOT U/S.37. THAT APART, THERE IS NO PROOF THAT THE ITA NO.336 5 /AHD/2007 - 3 - APPELLANT IS INVOLVED IN ANY BUSINESS AS PROHIBITED BY LAW AND THAT THE INTEREST IS PAID OR ANY SUCH BUSINESS. THE PRES UMPTION OF THE A.O. IS THUS NOT JUSTIFIED. THE APPELLANT ALSO RELI ED UPON VARIOUS CASES. 5.2 I HAVE CONSIDERED THE ASSESSMENT ORDER AND THE ABOV E SUBMISSIONS. IT IS SEEN THAT THE APPELLANT HAS CASH BALANCE AS PER THE CASH BOOK. IT IS NOT ESTABLISHED BY THE A.O. T HAT BORROWED FUNDS ARE NOT USED FOR THE PURPOSE OF BUSINESS. MER ELY BECAUSE THE APPELLANT IS MAINTAINING CASH BALANCE, IT CANNOT BE SAID THAT THE BORROWINGS ARE NOT USED FOR THE BUSINESS. THAT APAR T, THE A.O'S ARGUMENT ABOUT APPLICABILITY OF PROVISO TO SECTION 37(1) OF I.T.ACT ARE ALSO NOT JUSTIFIED FOR TWO REASONS, FIRSTLY THE CLAIM IS U/S.36(1)(III) AND NOT SECTION 37, SECONDLY IT IS N OT SHOWN AS TO HOW THE ASSESSEE HAS INCURRED THE EXPENSES FOR THE PURPOSE PROHIBITED UNDER THE LAW. THE DISALLOWANCE IS UNJUS TIFIED AND IS DELETED. 6. IN THE RESULT THE APPEAL IS PARTLY ALLOWED . 4. THE LD. A.R. SUBMITTED THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE CONSOLIDATED ORDER OF THIS TRIBUNAL IN THE CASE OF DCIT VS. M/S. PATEL SOMABHAI MAGANLAL & CO. IN ITA NO.42 96 TO 4300/AHD/2007, WHEREIN THE TRIBUNAL IN THE CASE OF ANGADIA DELETED THE SIMILAR DISALLOWANCE OF INTEREST EXPENDITURE. AS FA CTS OF THE CASE OF THE ASSESSEE ARE IDENTICAL TO THE FACTS OF THAT CASE, HENCE FOLLOWING THE ABOVE CITED ORDER OF THE TRIBUNAL, THE ORDER OF THE CIT(A) SHOULD BE CONFIRMED AND THE APPEAL OF THE REVENUE SHOULD BE D ISMISSED. 5. THE LD. D.R. AGREED WITH THE ABOVE SUBMISSION OF THE ASSESSEE. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIALS AVAILABLE ON RE CORD. IN THE INSTANT CASE, THE AO FOUND THAT THE ASSESSEE CLAIMED EXPEND ITURE ON ACCOUNT OF INTEREST PAYMENT OF RS.1,57,636/- ON BORROWED FUNDS AND INTEREST PAYMENT OF RS.3,02,253/- IN RESPECT OF PARTNERS CAP ITAL. THE AO OBSERVED THAT THERE WAS DEPOSIT OF RS.35 LACS WITH FEMA AUTHORITIES AND CASH BALANCE OF RS.19.83 LACS AT THE YEAR END. IN V IEW OF THE ABOVE, THE AO DISALLOWED INTEREST OF RS.3,72,510/- ON THE GROU ND THAT SO MUCH CASH BALANCE WAS NOT REQUIRED FOR THE GENUINE BUSINESS P URPOSE OF THE ITA NO.336 5 /AHD/2007 - 4 - ASSESSEE AND THE ASSESSEE WAS ENGAGED IN THE ACTIVI TY OF PROTECTING ITS CLIENT BY CLAIMING CASH BELONGING TO ITSELF WHENEVE R CASH IS CAUGHT BY THE FEMA AUTHORITIES, WHICH IS AN UNLAWFUL ACTIVITY. ON APPEAL, LD. CIT(A) DELETED THE ABOVE ADDITION. WE FIND THAT IT IS NOT IN DISPUTE THAT DEPOSIT WITH FEMA AUTHORITIES WAS IN CONNECTION WITH THE BU SINESS OF THE ASSESSEE AND THEY WERE NOT THE RELATIVES OR SISTER CONCERNS OF THE ASSESSEE AND IT COULD NOT BE ALLEGED THAT THE MONEY WAS GIVEN TO FEMA AUTHORITIES BY THE ASSESSEE FOR THE BENEFIT OF FEMA AUTHORITIES. FURTHER, NO MATERIAL WAS BROUGHT ON RECORD BY THE AO TO SHOW THAT ASSESSEE WAS ENGAGED IN ANY UNLAWFUL ACTIVITY AND THEREFORE, THE ALLEGATION MADE BY THE AO IN THIS REGARD IS UNSUSTAINABLE. FURTHER, IN OUR CONSIDERED OPINION, BUSINESS NEED IS TO BE ASCERTAINED BY THE BUSINESSM AN, AND IT IS HIS PERCEPTION WHICH IS MATERIAL AND NOT THE PERCEPTION OF THE AO. WE FIND THAT ON THE SIMILAR FACTS, THIS TRIBUNAL IN THE CAS E OF DCIT VS. M/S. SOMABHAI MAGANLAL & CO. IN ITA NO.4296 TO 4300/AHD /2007 IN AY 2001- 02 TO 2005-06, VIDE ITS ORDER DATED 18.09.2009, WH EREIN IT HAS HELD AS UNDER:- 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIALS AVAILABL E ON RECORD. THE SHORT ISSUE INVOLVED IN THIS GROUND OF APPEAL IS TH AT INTEREST EXPENDITURE ON AMOUNT BORROWED WERE DISALLOWED ON T HE GROUND THAT AMOUNT BORROWED WERE KEPT AS CASH WITH THE ASS ESSEE AND THE SAME WAS IN THE OPINION OF THE LEARNED ASSESSING OF FICER NOT UTILISED FOR THE BUSINESS PURPOSES OF THE ASSESSEE. THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) DELETED THE DIS ALLOWANCE OBSERVING THAT ASSESSEES BUSINESS WAS ALSO CONSIST ING OF TRANSFER OF MONEY. DUE TO THIS BUSINESS, THE ASSESSEE WAS RE QUIRED TO HAVE SUFFICIENT CASH ALWAYS SO THAT IT CAN MAKE PAYMENT OF AMOUNT ON DUE DATE. THUS, IN THE OPINION OF THE LEARNED COMMI SSIONER OF INCOME TAX(APPEALS) CASH POSSESSED BY THE ASSESSEE WAS ITS BUSINESS ASSET AND THEREFORE, INTEREST PAID ON BORR OWED CAPITAL FOR THAT CASH WAS BUSINESS EXPENDITURE OF THE ASSESSEE. WE FIND THAT GENUINENESS AND REASONABLENESS OF PAYMENT OF INTERE ST IS NOT IN DISPUTE. THE ONLY DISPUTE WAS THAT THE BORROWED FUN DS WERE UTILISED FOR THE PURPOSE OF BUSINESS OF THE ASSESSE E OR NOT. WE FIND THAT THE LEARNED DEPARTMENTAL REPRESENTATIVE COULD NOT DISPUTE THE FINDING OF LEARNED COMMISSIONER OF INCOME TAX(A PPEALS) THAT THE ASSESSEES NATURE OF BUSINESS REQUIRED IT TO PO SSESS CASH BALANCE OF SUFFICIENT AMOUNT OF ALL THE MATERIAL TI ME AS THE MAKING ITA NO.336 5 /AHD/2007 - 5 - OF TIMELY PAYMENT WAS THE ESSENCE OF BUSINESS TRANS ACTION OF THE ASSESSEE. WE FIND THAT IT IS NOT THE CASE OF THE RE VENUE THAT THE BORROWED FUNDS WERE UTILISED BY THE ASSESSEE FOR AN Y OTHER PURPOSES THAN ITS BUSINESS. THE ASSESSEE MAY BE IMP RUDENT IN HOLDING LARGE AMOUNT OF CASH BUT WHEN THE CASH WAS POSSESSED FOR BUSINESS PURPOSES IT WOULD CONSTITUTE BUSINESS ASSE T OF THE ASSESSEE AND THE BORROWINGS CONNECTED THEREWITH HAD TO BE HELD AS FOR BUSINESS PURPOSES. WE THEREFORE, DO NOT FIND ANY ERROR IN THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX(APP EALS) IN DELETING THE DISALLOWANCE OF INTEREST EXPENDITURE. THEREFORE, THIS GROUND OF APPEAL OF REVENUE IS DISMISSED. 7. WE FIND THAT NO SPECIFIC DEFECT IN THE ORDER OF THE LEARNED CIT(A) COULD BE POINTED BY THE LD. D.R.. IN VIEW OF THE AB OVE, WE DO NOT FIND ANY GOOD REASON TO INTERFERE WITH THE ORDER OF THE LEARNED CIT(A). IT IS CONFIRMED AND THE GROUNDS OF THE APPEAL OF THE REVE NUE ARE DISMISSED. 8. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSE D. ORDER SIGNED, DATED AND PRONOUNCED IN THE COURT ON 19/03/2009. SD/- SD/- ( T.K. SHARMA ) ( N.S . SAINI ) JUDICIAL MEMBER A CCOUNTANT MEMBER AHMEDABAD; DATED 19/03/2009 PARAS # COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE LD. CIT(APPEALS) 5. THE DR, AHMEDABAD BENCH 6. THE GUARD FILE. BY ORDER, //TRUE COPY// (DY./ASSTT.REGISTRAR), ITAT, AHMEDABAD